Carl v. C.I.R., 042781 FEDTAX, 2673-77

Docket Nº:2673-77.
Opinion Judge:DRENNEN, Judge:
Attorney:Daniel C. Ertel, for the petitioners. Bradford A. Johnson, for the respondent.
Case Date:April 27, 1981
Court:United States Tax Court

41 T.C.M. (CCH) 1346




No. 2673-77.

United States Tax Court

April 27, 1981

1. Respondent's determination of unreported taxable income approved, with certain exceptions. Cash on hand at the beginning of the period in issue determined by the Court.

2. Respondent carried his burden of proving that a part of the underpayment of tax required to be shown on petitioners' returns for the years 1969, 1970, and 1971 was due to fraud and that the returns were false and fraudulent with the intent to evade tax. Statute of limitations is no bar and fraud addition to tax approved.

Daniel C. Ertel, for the petitioners.

Bradford A. Johnson, for the respondent.



In a statutory notice of deficiency mailed to petitioners on December 21, 1976, respondent determined the following deficiencies in, and additions to, petitioners' Federal income tax.

Taxable Addition to tax
year ended sec. 6653,
Dec. 31 Deficiency I.R.C. 19541
1969 $10,148.20 $5,074.10
1970 11,062.86 5,531.43
1971 12,489.98 6,244.99
Respondent, using the bank deposits and cash expenditures method of reconstructing income, determined the foregoing deficiencies principally as a result of the underlying determination that the petitioners had understated income in the following amounts on their returns for the years involved: [2]
Year Amount
1969 $45,635.18
1970 40,414.24
1971 38,970.69
The issues for our decision in this case are: (1) Whether, and to what extent, petitioners improperly understated gross income from their return in each of the years in issue; (2) whether any such understatements were due to fraud with intent to evade tax on the part of petitioner Nicholas P. Carl; sec. 6501(c); [3] (3) whether, if any understatements for 1969 and 1970 were not due to fraud, they were in excess of 25 percent of the gross income shown on the returns for those 2 years; sec. 6501(e)(1); [4] and (4) whether petitioners are liable for section 6653(b) additions to tax. Any assessments for 1969 and 1970 are barred by the statute of limitations unless issues (2) and/or (3) can be answered affirmatively. Any assessment for 1971 is barred unless issue (2) can be answered affirmatively.[5] FINDINGS OF FACT Some of the facts were stipulated and they are so found. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference. Petitioners Nicholas P. Carl (hereinafter Carl) and Betty Carl, husband and wife, resided in Kingston, N.Y., when they filed their petition herein. For the taxable years in issue, petitioners timely filed joint Federal income tax returns with the Andover Service Center, Andover, Mass. General Information During the years 1969 through 1971, Carl owned a 50-percent interest in a partnership which owned a 4-unit apartment building in Port Ewen, N.Y. Carl reported income from this partnership of $335.40 for 1969. Ownership of the partnership interest was not reflected on the returns filed for 1970 and 1971 and no income or loss was reported with regard to that interest.[6] During the years 1969 through 1971, Carl owned a 4-unit apartment building located in Kingston, N.Y., which he had purchased in 1946. Carl reported the following with regard to this building:
1969 1970 1971
Gross rents $1,420.00 $1,740.00 $1,740.00
Depreciation (396.50) (396.50) (131.08)
Other expenses (860.87) (893.21) (856.23)
Income $ 162.63 $ 450.29 $ 752.69
During the taxable years 1969 through 1971, Carl maintained two brokerage accounts at the First Albany Corp., Albany, N.Y., through which he conducted various stock transactions. Carl first opened a brokerage account at the First Albany Corp. in October 1965, and he conducted various stock transactions thereafter. Petitioners also maintained the following bank accounts:
Bank Type Ownership
Kingston Trust Company
Acct. No. 1026689 Checking Carl
Acct. No. 4164505 Checking Joint
Heritage Savings Bank
Acct. No. 57-370 Savings Joint
No. 2142 Certificate Carl in
of Deposit Trust for
his wife
National Bank of
Orange and Ulster
Counties Unnumbered Carl
of Deposit
Petitioners never withdrew amounts from one account for redeposit in another and they seldom wrote checks to cash. Petitioners also had a safe deposit box at the Kingston Trust Co. On February 11, 1968 Carl borrowed $4,200 from the Kingston Trust Co. This loan was repaid on May 21, 1968. On May 21, 1968, Carl made a noninterest-bearing loan of $2,500 to a Charles Farley. This loan was repaid by Farley in three installments $1,500 on December 28, 1968; $500 on June 1, 1969; and $500 on January 2, 1970. In 1969, petitioners took a 2-week trip to Portugal and Spain, and in 1971 petitioners took a cruise to Bermuda. Petitioners did not receive gifts, inheritances, or insurance proceeds in large amounts prior to or during the taxable years in issue. Carl purchased U.S. Savings Bonds during the period 1943 through 1953. Between 1952 and 1973, Carl redeemed the savings bonds.[7] Carl's earnings for the years 1949 through 1971 were subject to FICA taxes. The maximum earnings subject to these taxes and Carl's earnings for the years 1949 through 1971 reported by Carl's employers are set forth in the following schedule:
Maximum Earnings Earnings Reported
Subject to to Social Security
Year Social Security Administration
By Employer Total
1949 $3,000.00 $ 206.00
1950 3,000.00 $ 555.74) 787.27
1951 3,600.00 42.75) 2,184.52
1952 3,600.00 3,600.00) 4,929.64
1953 3,600.00 3,140.78) 5,299.66
1954 3,600.00 250.92) 5,180.15
1955 4,200.00 4,200.00) 6,881.70
1956 4,200.00 4,200.00) 7,182.79
1957 4,200.00 2,051.74) 6,508.01
1958 4,200.00 12.00) 4,212.00
1959 4,800.00 4,800.00
1960 4,800.00 4,800.00
1961 4,800.00 4,800.00) 6,300.00
1962 4,800.00 4,800.00
1963 4,800.00 819.72) 4,709.53
1964 4,800.00 41.07) 4,800.00
1965 4,800.00 3.45) 4,800.00
1966 6,600.00 1.38
1967 6,600.00 -0-
1968 7,800.00 1,964.00
1969 7,800.00 3,507.00
1970 7,800.00 7,170.00
1971 7,800.00 7,028.00
Retreat Restaurant Carl's principal business activity during the years 1969 through 1971 involved owning and operating, as a sole proprietorship, the Retreat Restaurant (hereinafter Retreat) in Kingston, N.Y. Carl purchased the Retreat in 1963 for $35,000, consisting of a downpayment of $10,000 and a mortgage for the $25,000 balance. The $10,000 consisted of: (a) $2,000 - Personal check drawn on petitioners' checking account. (b) $4,000 - Loan from the Kingston Trust Co; and (c) $4,000 - Liquid assets. Included somewhere in the $10,000 downpayment was a $1,000 loan Carl received in 1963 from Charles Farley for the purchase of the Retreat. This loan was repaid within 1 year of its receipt. On February 1, 1963, Carl filed a Statement of Finance with the State of New York Liquor Authority in connection with his application for a liquor license for the Retreat. Carl included therein the following list of assets and liabilities:
Assets Amount
(a) Mortgage loan--Retreat $25,000
(b) Money deposited with Sellers of Retreat 2,000
(c) Checking account 4,000
(d) Bank loan 4,000
(e) Series E savings bonds 400
(f) Stocks and bonds 2,400
(g) Life insurance surrender value 400
(h) Automobile 1,100
(i) One-half interest in property owned by partnership 15,000
(j) Rental property 12,000
(a) Mortgage loan--Retreat 25,000
(b) Partnership property mortgage (one-half) 3,860
(c) Rental property mortgage 1,371
(d) Bank loan 4,000
In a financial report prepared by an investigator for the State of New York Liquor Authority which accompanied Carl's liquor license application, it was stated that the source of the $2,000 money deposit and the $4,000 checking account balance was cash which Carl had " kept at home in a safe and accumulated over a period of years. Mr. Carl stated that this cash was kept at home for him to use for investment purposes." The underlying business records for the Retreat were kept personally by Carl and consisted of check stubs documenting expenses paid by check and a day book in which were recorded the restaurant's cash receipts and disbursements. The figures used for cash receipts were taken from cash register tapes, which tapes Carl destroyed after he recorded the figures in the day book. Once a week Carl deposited the majority of the Retreat's daily cash receipts in the Kingston business checking account. He retained approximately $100 for personal expenses, which amount was generally deposited in the Kingston personal checking account. Carl never compared the sum of bank deposits and retained gross receipts with the figures shown on the cash register tapes or in the day book. During the years...

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